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Accept Special Sales Order

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AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock shows that manufacturing costs total $29.00 per lock. An analysis of this amount indicates that $16.75 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturing overhead. The normal selling price of this model is $38.75 per lock. A chain store has offered to buy 15,000 ZForce locks from AAA Lock at a price of $20.00 each to sell in a market that would not compete with AAA Lock's regular business. AAA Lock has manufacturing capacity available and could make these locks without incurring additional fixed manufacturing overhead.

Required:

a) Calculate the effect on AAA Lock's operating income of accepting the order from the chain store.

b) If AAA Lock's costs had not been classified by cost behavior pattern, is it likely that a correct special order analysis would have been made? Explain your answer.

c) Identify the key qualitative factors that AAA Lock managers should consider with respect to this special order decision.

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Solution Summary

This solution includes required calculations for the increase in operating income. Explanation for cost behavior effects and key qualitative factors to be considered are also discussed.

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Special Sales Orders for John Inc.

I need to understand this problem.

Accept special sales orders? John Inc. is presently operating at 50% capacity and manufacturing 50,000 units of a patented electronic component. The cost structure of the component is as follows.

Raw material $ 1.50 per unit
Direct Labor 1.50 per unit
Variable Overhead 2.00 per unit
Fixed Overhead $ 1.00.000 per year

A Mexican firm has offered to purchase 30,000 0f the components at a price of $6 per unit, the normal selling price is $8 per component. This special offer will not affect any of John Inc,s normal business. Management calculated that the cost per component is $7 so it is reluctant to accept this special order.

a) Show how management came up with a cost of $7 per unit for this component.
b) Evaluate this cost calculation. Explain why it is or is not appropriate.
c) Should the offer from the Mexican firm be accepted? Why or Why not?

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